According to a research report released by GTHT (Guotai Haitong Securities Co., Ltd.), October US CPI rose 0.4% month-over-month, while core CPI posted a third consecutive 0.3% monthly gain, both exceeding market expectations.

In terms of composition, energy, used cars and housing cooled simultaneously, but tariff-related goods and cost-sensitive services such as transportation clearly heated up. Excluding used cars and housing, core inflation rose to 0.4% month-over-month, indicating that the scope of price increases has broadened.

The firm believes this may signal that the second-round transmission of oil prices is unfolding. Combined with an October nonfarm payrolls report that beat expectations, a December rate hike is essentially certain, and the magnitude of the hike has become the focal point.

The main views of GTHT are as follows. Both CPI and core CPI month-over-month readings exceeded expectations.

October US CPI slowed to 0.4% from 0.6% month-over-month, above the market expectation of 0.3%. Core CPI held at 0.3% month-over-month, above the market expectation of 0.2%, while the seasonally adjusted annualized rate of core CPI edged down to 3.6% from 4.1%.

Energy fell to 0.7% from 5.2%, with gasoline dropping to 1.0% from 9.1%. Since November, oil prices have declined further, and the energy component may turn negative month-over-month in November. Core services contributed about 0.2 percentage points to the month-over-month CPI reading, making it the main driver.

Used cars and rents cooled, while core pressures spread to a broader range of components. On the core goods side, used cars swung to -1.2% from 0.7%, dragging down core goods, but the Manheim index already rebounded in October, and downward pressure on used car prices is expected to ease from December.

Price increases for tariff-related goods such as furniture, home appliances and toys accelerated notably, while gains in computers and peripheral equipment continued to narrow. On the core services side, owners' equivalent rent and primary residence rent fell to 0.32% and 0.20% month-over-month respectively, but the housing rent index continued to rise, suggesting the rent decline may not be sustained.

Among core services excluding housing, cost-sensitive components such as motor vehicle insurance, maintenance and repair, and public transportation heated up markedly. Core inflation excluding used cars and housing rose to 0.4% from 0.3% month-over-month.

The firm believes this may indicate that the second-round transmission of oil prices is unfolding. The ISM services price index remains elevated, corporate costs have not been fully passed on, and core services may still face upward pressure ahead.

A December rate hike is essentially certain, and the magnitude has become the focus. After the CPI release, CME FedWatch showed the market-implied probability of a December hike rising to 100% from 84%, with the probability of a 50 basis point hike climbing to about 9%.

The 2-year Treasury yield rose by as much as about 15 basis points, the 10-year yield briefly broke above 5%, the dollar strengthened, and gold and US equity futures fell. Governor Waller said that if October core CPI month-over-month comes in around 0.3%, a 50 basis point hike should be considered in December.

The firm believes a 25 basis point hike in December remains the base case, while the possibility of a 50 basis point hike is rising. The October PCE and November nonfarm payrolls reports due before the meeting will be key.

Risk warning: a prolonged stalemate in the Iran situation could trigger a second rebound in oil prices, and the Fed's hawkish tilt could exceed expectations.